Much of the growth and progress that United States achieved over the last century was made possible due to its strong and reliable public infrastructure. Public investments in assets, which included highways, roads, bridges, public schools and higher education institutions, water and sewer systems, ports, railways, airports etc., allowed the free market economy to thrive, creating wealth, opportunities, prosperity and improving quality of life of residents. Slowly, it is now becoming more apparent that public infrastructure is aging and there is a growing need for major investments to rehabilitate existing and create new assets. One of the key aspects of public infrastructure is not just the capacity it provides to local governments to facilitate the provision of essential services to residents but also the critical role it plays in assisting private farm and non-farm businesses to carry out their production and distribution activities. This translates into forward and backward economic linkages that, through a cascading effect, positively contribute to the national, state and local economies. In addition to these direct benefits, expenditures made toward periodic maintenance, rehabilitation and replacement of existing public assets help the economy by way of supporting large number of jobs.

Capital Expenditures of Local Governments

At the local level, capital expenditures are usually funded through federal and state grants, borrowings from the capital market using municipal bonds, property tax levies, sales and local option sales tax and sometimes by cash. A closer introspection of the financing mechanism for capital projects reveals that approximately 90 percent of U.S. total capital spending takes place at the state and local level. Besides using funds from their operating budget (mostly for larger local government entities), most local governments rely on state and federal funding of projects by way of direct transfers, loans and grants. It is therefore logical to infer that during hard economic times, as federal and state revenues decline, it ultimately impacts the local governments’ ability to undertake capital improvements. However, during periods of economic boom, besides relying on intergovernmental revenues sources, local governments also use local tax revenues, surplus fund balances and various types of debt instruments to finance capital improvement projects. However, depending on the state, there could be statewide revenue and spending limitations mandated by the state that could inhibit the capacity of local governments to finance capital improvements. That could sometimes add to the cost of capital investments at the local level and hence act as a deterrent. Given the historical context on the state of capital assets and the prevailing economic conditions, it is an opportune time to study the scale of capital expenditures at the local level and the factors that influence such investments. Given the recent economic slowdown and the subsequent recovery over the past 7-8 years, that will act as the backdrop for undertaking the proposed study.

The State of Iowa

Iowa is the leading producer of corn, soybeans and eggs and also boasts of diversified industry sectors that contribute to the state and local economy. With its strategic location, it is also the pathway that connects several large metropolitan areas in the nation and thus facilitates regional, national and global economic activity. According to the Iowa Economic Development Authority, Iowa is “home to a diverse and robust industry mix, Iowa offers a strong economy and numerous business opportunities in a variety of industry segments — including targeted sectors of advanced manufacturing, biosciences and insurance and financial services. Nine industry segments contribute $127.7 billion real gross domestic product (GDP) to Iowa’s economy, with the service industry employing more than one-third of the state’s workforce and manufacturing contributing the largest share (20.8 percent) of total output.” Iowa also presents an interesting case study to the recession’s lingering effects on rural areas. Many rural areas, including those in Iowa, have yet to regain the pre-recession employment levels that likely impact decisions on capital improvements.

The information is timely and will likely expand the discussion on the need for capital spending to keep the public infrastructure from deteriorating and making communities sustainable into the future.

Link below provides per capita capital spending for all 945 cities in Iowa. The table includes 4 select years that span a 10 year period, from 2005-2014.

City governments rely heavily on property taxes to fund a variety of services. In addition to being a major source of revenue, property tax also provides the local government entities to have some degree of control on changing it to levels that become necessary, adhering to state mandated codes. Cities that have a robust property tax base usually tend to be in good financial condition and those that have limited property tax base are restricted in their ability to provide services and make long term capital improvements. While other revenue sources like local option sales tax, user charges and fees are available, they are not as reliable and steady as property tax as a source of revenue.

In an effort to track fiscal health of Iowa municipalities, through the Iowa Government Finance Initiative, we have created two indexes – fiscal capacity and fiscal effort. These indexes were first used by the United States federal government in the 1960’s to make comparison between states on their overall fiscal health. Using the same concept, we have adapted it to help understand the fiscal health of Iowa municipalities.

In developing the two indexes, we have used city-level data on total property valuation, population and city-levy rates. The 945 cities in the state have been divided into following groups: > 50,000; 25K-49, 999; 10K-24,999; 2.5K-9,999; 500-2,499; and < 500.

Fiscal Capacity Index

For each of the subgroups, we have estimated the per capita valuation for each city by taking the ratio of its total property valuation and the population for the same year. Based on the sum of the total valuation of all the cities and the total population of all the cities, per capita valuation is then calculated for each subgroup.

To arrive at the fiscal capacity index, we use the ratio of the per capita property valuation for each city to the per capita valuation of the corresponding subgroup. To create the index, the ratio is multiplied by 100.

The fiscal capacity for each subgroup is 100. If a city has a fiscal capacity value greater than 100, it simply indicates that relative to the group, that particular city has a relatively higher per capita valuation. If the index for a city is less than 100, it indicates that relative to the group, that city has a lower per capita valuation.

Fiscal Effort Index

Fiscal effort is he ratio of each individual city’s per capita levy to the levy it would generate by using the group levy rate. Per capita levy is the ratio of the total property tax revenue in a particular year and its population. The group levy rate is determined by taking he ratio of the sum of all the property tax revenue to the taxable base of that group.

The fiscal effort index for each group is 100. If a city has an effort index of greater than 100, it indicates that the levy rate in that city is relatively higher than the group average levy rate and vice versa.

Fiscal Health

We use a combination of the capacity and index to define fiscal health. Four scenarios are possible based on he two indexes.

Local governments in Iowa provide vital public services affecting citizens’ quality of life and creating an environment for economic opportunity. While often undervalued for the role they play, local governments are an essential institution in the maintenance of civil society. The collective organizational capacity represented by municipalities, counties, school districts, and other local public entities is all too often not fully understood. Changes in demographic, economic and political factors are however, making the task of maintaining and improving local public services more difficult and challenging for the foreseeable future.

Increasing economic downturns, continuing depopulation of rural areas, aging infrastructure and rigidly divided political ideologies are contributing toward local government ‘fiscal stress.’ While there are different ways of defining fiscal stress, the most important feature is the added pressure on government finances as revenue streams slow down and expenditure level rises either due to rising cost or increasing demand. Using two indexes – fiscal capacity and fiscal stress, we are tracking the evolving fiscal health of local governments in Iowa. For a more detailed understanding of what the index means and how to interpret it, please refer to our recent publication in the Iowa County, a monthly publication from the Iowa State Association of Counties. The link to the article is